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McDonald’s global business model, the “three-legged stool”

Smita Nair

Understanding McDonald's: Comprehensive company primer and profitability analysis (Part 1 of 21)

Brief history and overview

McDonald’s, the world’s largest fast food chain, has over 34,000 restaurants across 119 countries. The company was founded in 1940 in the United States as a standalone barbecue restaurant. It was started by Richard and Maurice McDonald, who later revolutionized the company’s business model by using production line principles to set up hamburger stands. In 1955, businessman Ray Kroc joined the team and started franchising restaurants and improving company return on capital. Today, McDonald’s serves nearly 70 million global customers daily.

The franchise’s most common menu items include hamburgers, cheeseburgers, French fries, chicken, soft drinks, milk shakes, breakfast menu items, and desserts. Recently, the company has broadened its menu to include salads, fruits, wraps, and smoothies.

Most McDonald’s restaurants are operated by the holding company, its franchisees, or affiliates. Revenues consist of owned-restaurant revenues, royalties, rent, and franchisee fees. In 2012, the company has approximately $27.5 billion in sales and $5.5 billion in earnings.

Three-legged stool

McDonald’s business model, depicted by the “three-legged stool” of owner/operators, suppliers, and company employees, is its foundation; and the balance of interests among the three groups is essential to the company’s success. The Company currently has over 1.8 million employees and 5,000 franchisees. Recently, the third leg of this stool has been a source of consternation for both McDonald’s management and investors, as many of the company’s employees have been aggressively demanding increases in wages. For more information on recent minimum wage conflicts at fast food chains, please view this recent series, Why fast food strikes and proposed wage increases don’t matter, by Market Realist analyst Xun Chen.

The strength of the alignment among the company, its franchisees and suppliers, and employees has been key to McDonald’s success. This business model enables McDonald’s to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities it serves. In addition, it facilitates its ability to identify, implement and scale innovative ideas that meet customers’ changing needs and preferences.

McDonald’s has a successful franchise business model wherein all restaurants are operated either by the company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements. The company’s operations are designed to assure consistency and high quality at every restaurant. When granting franchises or licenses, the company is selective and generally is not in the practice of franchising to passive investors.

Overall, McDonald’s combination of owned and franchised restaurants has been very profitable for its investors over the past view years. Explore this series to get a better understanding of the fundamental drivers of the company’s profitability and stock price.

Continue to Part 2

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